Wolseley, the world's largest distributor of heating and plumbing equipment, added to the gloom in the wider stock market yesterday by revealing that its North American profits had plunged by 40% in the five months to the end of December.

Shares in the British company, which obtains half its group sales in the US and Canada, fell a further 12% as the City reacted negatively to Wolseley warning that "markets are likely to worsen" throughout its global operations. The stock later recovered to close down 3.7% at 689.5p. Wolseley has lost half its stock market value over the past year and said overall profits before tax and exceptional items were down by nearly a third as the US was hit by a slowdown in new house starts coupled with plunging consumer confidence and a weaker dollar.

Britain and the Nordic area have so far remained some of the few bright spots, but the company admits it has run into problems in France and other Continental European countries and may not be able to rely much longer on a now-precarious British housing market.

Wolseley has cut 3,000 jobs this year, slowed new store openings and slashed discretionary spending but said last night it might cut £100m - or 20% - off its capital spending plans for 2007 and 2008 to respond to rising challenges. "We have been pretty aggressive so far in our actions and believe we are where we want to be today in relation to our business but if markets deteriorate further then clearly we will have to have another go at the cost base," said Steve Webster, the finance director.

Equity analysts were taken aback by the scale of the difficulties facing the company. "This is substantially worse than we had expected ... The outlook is not positive and we [our profit forecasts] are clearly too high for the year. It looks as if earnings will be down by at least 15% this year," said Kevin Lapwood, analyst at Seymour Pierce while Numis Securities said it would be cutting its 2007/2008 profit forecast by nearly 40% to £500m.

The hardest hit part of the group has been the Stock arm of Wolseley's US business which recorded a trading loss of £25m compared with a £45m profit in the same five months of the previous year, despite cutting its head count by a quarter.

"The [US] housing market is likely to deteriorate further until the current high levels of unsold inventory have declined and the full effects of problems in the sub-prime market have been assimilated," warned the company which expects to save £60m a year from the 3,000 job cuts in the US.

The group, which employs about 77,000 people in 28 countries in North America and Europe, has in the past year been operating in a market that the US Commerce Department described as representing the worst housing conditions for builders in 30 years. The similar downturn as in the US is beginning to be felt in Britain with the Royal Institution of Chartered Surveyors recently reporting the worst house price statistics for 16 years.

"There are increasing signs that the UK housing market is slowing in response to the lower availability and increased cost of mortgage financing. In addition, the rate of growth in the UK repair, maintenance and improvement market has been weakening," said Wolseley.

The company, which previously had a reputation for being a solid and reliable stock market performer, last signalled the scale of its difficulties in November when it reported plans to cut 1,300 jobs on top of 1,700 redundancies it was making.

Despite the problems the company remains upbeat about its prospects saying it still intends to make bolt-on acquisitions where it can find good value.